Why the New Egyptian President’s Biggest Worry Could Be the Economy

Rising debt and lower growth threaten to derail Egypt’s revolution as much as grasping generals do. President Morsy's political fate may depend on whether or not he can turn around a staggering Egyptian economy

The newly elected President of Egypt, the Muslim Brotherhood’s Mohamed Morsy, has taken on one of the most daunting jobs in the world. He’ll have to restore stability to a country ravaged by political upheaval, wrest control of Egypt’s fading revolution from the country’s old guard and convince doubters at home and abroad that an Islamist can manage the Arab world’s most populous nation with tolerance and pragmatism. Yet in the end, Morsy’s political fate may depend on whether or not he can turn around a staggering Egyptian economy.

Though there have been many causes of the uprisings in Egypt and elsewhere in the Arab world — most of all, decades of political repression — economic woes also played a key role in sparking the Arab Spring. While other developing regions of the world, especially East Asia, have witnessed massive surges in wealth and economic clout in recent decades, the Middle East has been running in place, especially those countries unlucky enough not to have large reserves of oil or gas.

Poor education and feeble governance have scared off the foreign investment and stifled the private entrepreneurship that drove the economic miracles in China, India and Indonesia. Arab nations also got shut out of the lucrative manufacturing-and-export networks that have enriched Asia today. As a result, Arab economies have failed to generate good job opportunities to absorb a young and restive population. It’s been these disenchanted and poorly employed youth who have led the continuing protests in Tahrir Square. Unless Morsy manages to create more jobs and boost incomes, the disaffected and disappointed youth of the nation could turn on their elected leaders in a destabilizing cycle of perpetual unrest.

That task would have been hard enough, but the months of unrest in Egypt have made its economic situation even more desperate. Growth has plunged from a robust 5.1% in fiscal 2009–10 to 1.8% last year, according to IMF figures. The IMF expects GDP to inch upward by only 1.5% this year. Unemployment also rose and investment sank amid the political crisis. Most dangerous of all is a worrying deterioration in the country’s financial strength. As the number of tourists carrying hard currency to the country has dropped off, so has the nation’s ability to buy imports and pay its international debt. Foreign-exchange reserves, excluding gold, stood at the equivalent of only 3.3 months of imports at the end of May, compared with more than six months a year earlier. Meanwhile, the fiscal deficit, inflated by subsidies, has swelled to more than 10% of GDP, filled in by the interim government with rising amounts of debt. This scary combination of negatives must be reversed if Egypt is to avoid a crisis. “Time is not on Egypt’s side,” analysts at Bank of America-Merrill Lynch recently warned.

Time, though, is exactly what Morsy needs, since fixing Egypt’s economy will require lots of it. In the short term, Morsy will have to rein in the budget deficit, which will likely entail politically sensitive reforms of costly fuel and food subsidy programs. The IMF said on Tuesday that it was willing to step in and help Egypt, which has been seeking a $3.2 billion loan from the organization. But Morsy will probably have to put in place a stable government and adhere to a slate of reforms before the IMF will release any funds.

In the long term, Morsy will have to restart Egyptian growth by eliminating red tape and improving the business climate in order to woo foreign investors, free up private enterprise and create much needed jobs. Morsy and the Muslim Brotherhood have floated a reform agenda that is generally probusiness and seeks to attract foreign investment in the country. However, the big question is: Will he actually be able to implement reform? The Egyptian military has clearly moved to curtail the authority of the new President and other elected officials. Its leadership usurped the power of the parliament, which was recently dissolved by the Supreme Court, and took control of the process of writing a new constitution. The likely confrontation between the elected Morsy and the unelected military brass over the course of Egypt’s revolution will probably keep the political situation uncertain for some time to come, scaring off potential investors and making the economic problems harder to solve. Barclays said in a June 18 report that a prolonged political transition increases the risks to the economy:

Egypt has to repay more than USD2bn in debt maturities over the next three to four months, which could increase pressure on already thin FX reserves and on the EGP (Egyptian pound) … The short-term outlook is likely to be volatile, and we reiterate our recommendation to remain underweight Egyptian assets.

The bottom line is that until Egypt’s politics get fixed, the economy can’t get fixed. As the level of uncertainty over Morsy’s government remains high, his ability to bring about change will likely be low. That doesn’t bode well for Egypt’s jobless or the future of its democratic revolution.